Department
of Health and Human Services

Office of Inspector General -- AUDIT

"Audit of the North Carolina Office of Information Technology Services Internal Service Fund," (A-04-04-03503)

September 30, 2005

Complete
Text of Report is available in PDF format (1.41 mb). Copies can also be obtained by contacting
the Office of Public Affairs at 202-619-1343.

EXECUTIVE SUMMARY:

Our objective was to determine whether North Carolina refunded to the Federal Government the Federal
share of all refunds and transfers from the State’s Information Technology Services’ (ITS) internal
service fund. We audited refunds and transfers from ITS in State fiscal years (FYs) 2002 and
2003. At the request of the Division of Cost Allocation, we also reviewed all transfers that
ITS made to the State’s Year 2000 Special Fund (Y2K fund) in FYs 1997 and 1998. With respect
to refunds, DHHS appropriately credited its Federal programs to comply with OMB Circular A-87. With
respect to transfers, ITS transferred $34.2 million in excess revenues from its internal service fund
to the State’s Y2K fund and general fund. Contrary to OMB Circular A-87 requirements, the State
failed to return the Federal share of $8.2 million (consisting of $4.5 million transferred to the Y2K
fund and $3.7 million transferred to the general fund.) The State did not return the $8.2 million
because ITS did not have procedures in place to ensure that the Federal Government received its share
of all revenues in excess of costs. We recommended that North Carolina: (1) refund $4.5
million to the Federal Government for the estimated Federal share of ITS transfers to the State’s Y2K
fund and determine whether additional refunds are due the Federal Government for the actual Federal
share of those transfers, (2) refund $3.7 million to the Federal Government for the Federal share of
ITS transfers to the State’s general fund, and (3) implement appropriate procedures to ensure that
the Federal Government receives its share of any revenues in excess of costs in the future. State
officials generally disagreed with our computation of the Federal share of monies transferred to the
State’s Y2K and general funds. Despite the State’s assertions, we continue to believe that our
calculation of the Federal share of Y2K and general fund transfers was accurate.